Activist Sets Sights on Another Health-Care Company with Break-Up Potential

Business: Evolent Health Inc. (EVH)

  • Service: Evolent is a health-care delivery and payment company. It supports health systems and doctor organizations in their migration from fee-for-services repayment to value-based care and population health management payment designs. The business has 2 segments– services and True Health. The services segment includes medical and administrative options created to assist payers and suppliers to administer value-based reimbursements. This sector consists of Identify, a proprietary innovation system that aggregates and examines information, manages care workflows, and engages clients. The services segment also provides specialized care management solutions that support a variety of specialized care delivery stakeholders throughout their transition from fee-for-service to value-based care. The Real Health segment is a physician-led health strategy in New Mexico readily available through the business market for employer-sponsored health protection. True Health manages complete health insurance and gets RFP to run health plans in various locations.
  • Stock Exchange Worth: $1.2 billion ($ 13.35 per share)

Activist: Engaged Capital

  • Percentage Ownership:9.99%
  • Typical Expense:$12.76 per share
  • Activist Commentary: Engaged Capital was established by Glenn W. Welling, a previous principal, and managing director at Relational Investors. Engaged make focused investments in small and mid-cap underestimated public business with a two-to-five-year financial investment horizon. Its style is holding managements and boards accountable behind closed doors.

What’s Happening:

Engaged plans to evaluate its investment in the business on a continuing basis and to interact with the company’s management and board concerning possible steps to unlock the intrinsic value of the company’s core company, consisting of, however not limited to, enhancing capital allocation, divesting non-core assets and/or checking out a sale of the entire business.

Behind the Scenes:

The services service is the company’s core service, accounting for 80% of its income. This company had grown traditionally at a 40% CAGR and 2020 guidance has 30% development. On the contrary, the True Health service is really capital extensive and has not performed well. The business has composed off $47 million on its acquisition of an Oklahoma health plan and stopped working to grow its Kentucky health strategy, leaving it with just a New Mexico plan. Regardless of this, by refinancing its convertible debt on less favorable terms rather of redeeming it with money the business expects to get from its plan with Passport Health, management is showing that it intends on continuing to purchase the True Health segment and its crappy ROI service.

The health-care sector has been making a move away from fee-for-service to value-based care and Evolent is the biggest and best player in the industry. There is a chance here to rapidly scale the services service and substantially increase the number of lives on the system from the current 7.5 million, particularly if that company is offered to a strategic financier. Evolent has been a desired possession by a number of strategic gamers, consisting of large handled care plans like United, Anthem, and CVS, and other healthcare IT players like Epix.

This is a book activist chance where a business spends the cash from its rewarding, growing core organisation and spends it on a money-losing, non-core service. Engaged will prompt the board to firstly exit the Real Health service, allowing management to focus its time and resources on the services business. This should close some of the space between where Evolent trades (1.5 x profits) and its peers trade (3-4 x profits). Then, Engaged will request the board to explore its strategic options, consisting of a sale of the business. In 2018, Cerner made a minority investment in Evolent’s smaller peer, Lumeris, at 6x revenue.

If Engaged is not able to constructively engage with the company by Jan. 10 when the nomination window opens, we would expect them to nominate a complete slate of directors for the 2021 class. The 2021 class of directors has 3 filled board seats and one job, so Engaged stands a chance to win 4 of ten seats. Furthermore, the company’s creator and CEO, Frank Williams, is in this director’s class. As he has currently revealed that he will be stepping down as CEO to become Executive Chairman on October 1, losing his board seat will leave him without any role in management. Engaged would likewise have another tailwind to a proxy fight in that for the previous two years ISS has made recommendations versus all directors due to hostile investor arrangements in the Business’s charter and laws.

Engaged has had 3 other exited health-care financial investments– Aratana Rehabs, Volcano Corp, and HeartWare International. While their returns are somewhat mixed in those financial investments, in everyone they ultimately were able to get the board to offer the Business at a healthy premium to the previous day’s stock rate (Aratana – 40%, Volcano – 57%, and HeartWare – 93%).

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